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Big Mac or Wonton?

For over 20 years now the Economist magazine has been tracking relative purchasing power of currencies using the Big Mac index. The concept is that a Big Mac is a uniformly manufactured product in each country and therefore labour cost and productivity and material costs per unit of production should equate to currency exchange rates.

Based on the latest published Big Mac index the Chinese Yuan is 48% undervalued. In China a Big Mac costs US$1.95 using current exchange rates for $US to Yuan while in the US it costs US$3.73. US economists and government agents are urging China to revalue their currency upwards. They hope this might bail out the stalled US economy so Americans will buy more home manufactured goods and Chinese will buy more from the US.

But currency is a relative game. Itís like to stand off between two gunfighters arguing who drew first and therefore who should put their guns away first. If we looked at the Big Mac index from a Yuan point of view the US (and all other countries) needs to devalue their currencies. But this is a big ask for the US culture to accept given their blinkered US centric view of the world. It is also a paradox in that if China did revalue, would not the Chinese economy become bigger than the US in $US?

Posted Wednesday, 13 October 2010

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